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Euro Strengthens On Rate Hike Expectations

Markets showed positive growth for the second day this week as nuclear reactors stabilized in Japan bringing down fears of escalation of a nuclear crisis in the nation. The Nikkei rose 4.36%, Topix climbed 4.54%, Hang Seng rose 0.76% and Shanghai Composite rose 0.3% after the Dow settled 1.5% yesterday on positive developments. Unrest continues to risk the MENA region as airstrikes continued in Libya and protests grew stronger in Yemen which could disrupt oil supplies even further, thus raising commodity prices and bringing in strength in Gold as a safety measure.

EU finance ministers in their meeting yesterday unveiled new steps to fight the crisis amid criticism from the ECB for doing too little to prevent budget shocks and any further bailout from threatening the EUR strength. The ministers settled on how to enable a permanent rescue fund to lend 500 Billion Euro as of 2013 while remained divided on how to utilize the full capacity of the EFSF 440 Billion Euro fund. The ESM will draw on 80 billion Euros of paid-in capital and 620 billion Euros of callable capital, enabling it to lend 500 billion Euros. Countries with per capita GDP below 75% of the EU average (Estonia & Slovakia) will pay less for 12 years. The future aid facility will charge 2% more than its funding costs to lend for up to three years, tacking on an extra 1% for longer-term loans. Finance ministers confirmed that the ESM will enjoy preferred creditor status and will follow IMF case-by-case standards for deciding whether to require private bondholders to share the costs of bailouts.

Also, ECB officials indicated the economic uncertainty caused by Japan’s earthquake may not deter them from raising interest rates next month. ECB President Trichet also told the European Parliament he has “nothing to add” to his March 3 remarks, when he said policy makers may raise the benchmark rate from a record low of 1% at their next meeting in April. The EURUSD rose above $1.42 for the first time since November and government bonds declined as investors increased bets on higher ECB borrowing costs.

We have UK inflation data out today which would help in adding further pressure on the BOE to increase rates if prices continue to remain higher, more than the 2% target rate, Canada release retail sales figures, US releases house price index and Richmond area manufacturing numbers while Fed’s Fisher, SNB’s Hildebrand, US Treasury’s Geithner and BOE’s Sentance speak today.